With inflation continuing to flare up in the euro area, and the consequent need to raise rates more aggressively to try to put it out, how can the ECB continue to support Italy through the purchase of BTPs? And there was something that the European Union should (could) have done and that maybe should (could) do, to help Italy and the other countries of the bloc to cope with the drama of energy inflation, in essence, of the expensive bills?
Today it goes on stage again the BTP drama on the markets, with the BTP-Bund spread traveling in the 240 area, close to the threshold that various analysts have indicated as the danger threshold (identified near the 250 level). Bloomberg reports in an article that Italian bonds are primarily losing ground in the euro area government bond market, with sell-offs leading 10-year BTP rates above the 4% threshold for the first time since 15 June.
In a macro context that is becoming more and more complicated, the advice-warning to the EU of Kenneth Rogoff, professor of economics at Harvard University and former chief economist of the International Monetary Fund (IMF) and the Federal Reserve.
Interviewed by La Stampa, Rogoff states that, “Europe against energy inflation it had to use more fiscal stimulus. And now the European Central Bank is also in trouble ”.
In the specific case of Italy, Rogoff pointed out that, with “The prices that will remain so high for years it will be more difficult for the ECB to help Rome“ (read BTP, sovereign debt, public debt, practically Italy’s Achilles heel).
Rogoff’s words will certainly not surprise the world of hedge funds who, as well as reported a few days ago from Financial Timesin view of the political elections scheduled for next September 25, are piling up against the Italian debt largest short bet dal 2008.
“Investors are worried about political tensions and rising economic challenges”the British newspaper article noted.
Eurozone, ECB has its hands tied. What can the EU do?
Rogoff raises the doubt that, (we will say in spite of the Next Generation EU baked from Brussels to give concrete aid to European countries struggling with the nightmare of the Covid-19 pandemic), the EU has not really done enough this timeto shield the economies of the bloc from the consequences of the blaze of inflation.
Just yesterday, from the latest Eurostat report, it emerged that Eurozone inflation hit a new high, with a 9.1% surge in August.
To accelerate the pace too inflation in Italy.
But, according to Rogoff, what should Brussels have done and what can it do to stem the crisis in Europe exposed to the drama of war between Russia and Ukraine and more vulnerable than many other countries to the economic consequences of the conflict? In the interview with La Stampa Kenneth Rogoff went straight to the point: in his opinion, the recipe leads the name of “Fiscal policy”.
Fiscal policy understood in an expansionary sense, given that the ECB must concentrate on extinguishing the fire of inflation with an inevitably more restrictive monetary policy.
“Let me explain – the economist said – on this front Europe was not extreme as the US was. It should act with this lever “.
On the other hand, “Europe is in a much more difficult situation than the United States. This is because it is not energy independent. The US essentially is. Hence, Europe is being dragged down by the flare-ups in gas and oil prices. All without counting the other consequences of the Russian invasion of Ukraine, such as the influx of refugees and the need to pay attention to defense capacity, a chapter long neglected ”.
Rogoff (formerly the IMF) recalls EU limits
Rogoff thus brings back to the fore the old question concerning the role of the European Union, which always lags behind the United States in terms of expansionary fiscal policy for long-standing reasons which essentially relate to the fact that the EU in many ways is not a union.
Tax policy made in Brussels in short, it does not have that firepower that Washington can boast (excluding at the moment the various worms of the US deficit and debt, which the United States will have to deal with sooner or later).
It has been in recent years to patch this gap the ECB, with its various monetary bazookas baked in an almost incessant way, first with Mario Draghi and then with Christine Lagarde.
But inflation is now setting the European central bank with its back to the wall.
In reality, according to Rogoff, considering all the problems currently affecting the EU (energy crisis in the first place), “The ECB will probably end up, inevitably, by not raising interest rates as much as the Federal Reserve did”. Il “Biggest problem” is another, that is “What to do with Qe. Which is on the one hand a necessary tool to support the public debt of Italy and other Southern European countries, but which is fundamentally an expansionary policy, just when Frankfurt is trying to restrict ”.
ECB towards maxi-rate hike, BTPs suffer
On 21 July, on the day of the resignation of Prime Minister Mario Draghi, in an Italy shaken by the government crisis, Christine Lagarde’s ECB announced the long-awaited euro area anti-fragmentation shield, known in Italy as an anti-spread shield or BTP saves. The shield was baptized TPI (Transmission Protection Instrument).
However, Lagarde sent out a very clear message: the ICC will certainly not be the godsend that Italy and other countries with a high Eurozone debt-to-GDP ratio have been accustomed to receiving. In short, no free meal. No free lunch, much less in favor of Italy, which had the audacity to disavow the Draghi government. The activation of the ICC will be at the discretion of the Governing Council of the ECB as, as Lagarde said, “We will not be hostage to anyone“.
With the ongoing energy crisis, which culminated among other things yesterday in the stop of gas supplies from Russia to Europe through the Nord Stream 1 pipeline, the Nord Stream 1 pipeline, for three days, decided by the Russian energy giant Gazprom, with uncertainty related to political elections, with inflation rising further as yesterday’s data show, the ECB has its hands tied.
Returning to the movement of BTPs, the boom in rates is actually explained by the bets of traders, who have been betting for days not only on a more hawkish Fed, but also on a more aggressive ECB on rates, ready to raise rates by up to 75 basis points at the next meeting of the Governing Council on 8 September.
Bloomberg reports that traders are now betting on a rate hike in the euro area up to +241 basis points by July 2023, double what was expected just a month ago. Among other things in the last few hours Joachim Nagel, President of the Bundesbank and member of the Governing Council of the European Central Bank, has given ample evidence of his German hawk nature hoping “A strong reaction” of the Eurotower to the inflation boom equal to + 9.1% of the euro area.